With Barclays (LSE: BARC) having reported disappointing results last week, many investors may think that the bank is doomed to fail. After all, it seems as though there’s a continual flow of bad news from Barclays, with dividends being cut, expectations for profit growth being pushed back somewhat and the financial performance of the bank deteriorating versus the first quarter of last year.
Yet such challenges are to be expected when a new CEO takes the helm at a company that’s not performing at its peak level. In other words, most new CEOs would rather take action necessary to turn a company around at the start of their tenure and put it on the path to growth as fast as possible. And with Barclays’ CEO being new to the role, he has licence to make major changes if he feels they’ll be in the bank’s long-term interests.
Of course, this means that there’s a degree of pain in the short run and this is just what Barclays is experiencing at the moment. With the bank’s share price having fallen by 21% year-to-date, it’s clear that the market is rather displeased about the performance of the bank. But even though a cut in dividends proved highly unpopular, the capital saved by doing so can be used to improve the financial stability of Barclays and help to position it for improved bottom-line growth over the coming years.
Great potential
On this front, Barclays appears to have real potential. Although in the current year it’s expected to record a fall in net profit of 5%, next year is set to be a very different story. In fact, Barclays’ earnings are expected to rise by around 42% in 2017 and this could be enough to dramatically improve investor sentiment in the remainder of 2016 as the market begins to price in a step-up in financial performance. And with Barclays trading on a price-to-earnings (P/E) ratio of just 7.6, there seems to be huge scope for an upward rerating. In fact, a doubling of its share price over the medium term wouldn’t be out of the question.
While Barclays’ future is highly uncertain, such times can prove to be the most opportune to buy and hold for the long term. After all, no company’s share price is ever cheap without a reason and in Barclays’ case it’s because the bank is unpopular among investors and due to it having a relatively uncertain future. However, with Barclays having a sound asset base that has the potential to deliver significant improvements to profitability and a strategy which, while painful in the short run, could come good longer term, it appear to be well worth buying and certainly not doomed to fail.
